Group Case 3: Mci Communications Corp., 1983

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Group Case 3: MCI Communications Corp., 1983

Executive Summary

Assumptions

The following are the assumptions we made through the whole analysis. The predicted revenues from 1983 to 1990 were assumed to follow the pattern in Exhibit 9A, despite the uncertainty of the higher access charge and competition increase. The marginal tax rate is 30% during that period.

The firm must keep minimal cash balance of $100 million to support its operating activities. However, the change of operating NWC is assumed to be zero.

Calculation

To calculate the external financing needs during the period 1983-1990, we need to calculate the net cash flow from operation (i.e. the free cash flow minus after tax-interest paid). Along with the cash at the beginning of the year and the required minimum cash balance, we can get the external financing need for each year. See detailed calculation in Exhibit 1. However, due to the uncertainty of access charge change and competition, the operating margin would increase or decrease by as much as 7% from the prediction, although the management was committed to the predicted revenue levels. Therefore, the external financing needs would vary correspondingly. See detailed calculation in Exhibit 2, and 3. The external financing needs under three scenarios are summarized below. In 1983, the company had no external financing needs, as it just raised $400 million in March. From 1984 to 1987, the financing needs kept increasing, as the company tried to expand. After that, there was no external financing need as the earnings are in good levels, except in the case of unfavorable situation where it still needs $270.78 million in 1988.

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Recommendations & Conclusion

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Exhibit 1 Operating Margin at Predicted levels

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Exhibit 2 Operating Margin Decreased by 7%
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Exhibit 3 Operating Margin Increased by 7%
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